UNIT5

Public Enterprise

PARTI

Discussion

• What are the reasons why governments establish public enterprises? Why are public enterprises considered to be part of the public sector?

• What kinds of public enterprise do you know?

• What problems may public enterprises be faced with?

• Why are many public enterprises being privatized in most developed and developing countries?

1. Read text A and give the definition of a public enterprise in a nutshell.

Text A

A public enterprise is a particular kind of statutory authority: one that sells goods and services to the public on a large scale, with the financial returns accruing in the first instance to the authority itself. Most public enterprises are in the non-budget sector, and operate with substantial independence. Public enterprises provide many services including, in some countries, utilities such as telecommunications, electricity, gas supplies, water and sewerage; transport, such as rail, airlines, shipping services and urban public transport; financial services, notably banks and insurance companies; and agricultural marketing. Some countries have government-owned oil companies, motor vehicle companies, tobacco and alcohol companies. Indeed, it is hard to imagine a particular product or service that has not been government-owned in at least one country at one time. The only point in common of all these is their government ownership.

2. Translate Text A into Russian.

3. Translate the following definitions into English.

Государственное предприятие

Предприятие, основные средства которого находятся в государственной собственности, а руководители назначаются или нанимаются по контракту государственными органами. Если Г.п. является бюджетным, то оно финансируется из средств государственного бюджета. Предприятия, находящиеся в непосредственном ведении государственных органов, называются казенными

(Унитарное предприятие), (Казенное предприятие).

Энциклопедический словарь экономики и права

Предприятие, находящееся в государственной собственности, регулируется и контролируется государством. Руководство предприятия назначается государственными органами и полностью отвечает за результаты своей деятельности перед государством.

Словарьбизнес-терминов

4. Scan Text B to find information supporting or contradicting the following statements:

1. Public enterprise is still a major producer of public goods and services.

2. Public enterprises are considered to be an important part of public sector management.

3. Government-owned organizations selling goods and services to the public are on the rise.

4. In the 1980s public enterprises were privatized in most countries.

5. Public enterprises can be effectively controlled.

Text B

Public enterprise was for a long time an important part of the public sector in most developed or developing countries, but, with privatization, the size and importance of the sector is declining. It now seems in some danger of disappearing altogether as countries have rapidly moved away from government production through public enterprise.

There are two reasons for looking at public enterprise as part of public sector management. First, the sector is particularly important for arguments about the scope of government activity and the debate and outcome of privatization of public enterprise has implications for the public sector as a whole. Secondly, public enterprises pose particular management problems even compared to the rest of the public sector, most noticeably the control and accountability of government organizations aiming to make money.

Public enterprises were the first target of those aiming to reduce the size of the public sector in the 1980s. Even though major public enterprises such as the post office still exist in many Western countries, including the United States, there seems little doubt that the idea of government-owned organizations selling goods and services to the public has passed its heyday. Although the public enterprise sector was large in many countries its activities formed only a minor part of political discourse.Starting in the early 1980s it became a focus of political controversy, with its very existence in question.

One of the key, and quite unresolvable, political questions concerns the allowable limit of government activity. Matters of ideology about the overall role of government became bound up with the ownership of public enterprise. As public enterprises operated at the boundary of public and private sectors in mixed economies, arguments about them were often about the desirable role of government itself. The answer in the debate was overwhelming, in developed and developing countries alike, that governments should dispose of their public enterprises: and they did. The most significant of the early programmes of privatization was in the United Kingdom. Between 1979 and 1993 nationalized industries in that country fell from 11 per cent of GDP to 2 per cent, and from 1.8 million employees in 1980 it fell to less than 400 000 in 1994. The privatization movement then spread to other countries, to the extent that, from the early 1980s to 1993, more than 7000 enterprises had been privatized.

Public enterprises always had particular management problems, including accountability, regulation, social and industrial policies, investment policy, and financial controls. Of all these, control and accountability are particular problems for public enterprises, which are deliberately set up to be relatively independent of direct political control. Setting control at a satisfactory level has beena perennial problem both for governments and their enterprises. If control is too tight, there is no advantage in having them set up as entities with a significant degree of independence. If government control is too loose, an enterprise may not be accountable to its owners, the public, raising a question as to why it is in government hands at all. Indeed, one of the arguments for privatization is that public enterprises cannot be effectively controlled and their accountability is inherently inferior to that of private companies.

Public enterprises are a noteworthy part of the public sector.They may shrink so far as to become nothing more than an interesting diversion in the history of government institutions. They may, though much less likely, gain a new lease of life. Perhaps all activities that can be carried out by the private sector, should be. Even with widespread privatization, public enterprise is still an important part of the public sector in many countries and many of the arguments about reducing public enterprise also apply to the public sector in general.

5. Summarize the contents of Text B in Russian.

Suggest an English/Russian title for the text.

6. Translate Text B into Russian paying special attention to the underlined sentences.

PART II

Text C

Kinds of Public Enterprise

Public Utilities

Public utilities provide services – water, sewerage, electricity, gas, and telecommunications – considered essential for the economy as a whole. These are usually provided as services with connections to households from a network. This makes for two unusual features. First, the household connection means there is a real, or at least a tendency towards, ‘natural monopoly’. Once a network is established, it becomes continually cheaper to add extra consumers. Competition is constrained, as the cost of providing service to a new customer for a new entrant to the industry, faced with the cost of establishing a network, should be higher than the rate that could be charged by the incumbent. For example, with wire-based technology, competition in the local telephone network or in electricity distribution would mean an extra set of cables being laid in each street and electricity poles on both sides of the road. Since the initial expense would be too great, a new entrant at this level is most unlikely and there is, therefore, a tendency to monopoly provision.

Secondly, the essential nature of public utilities means the services they supply are politically sensitive, with great disruption to the private economy and households resulting if supplies are interrupted. Water and sewerage connections are matters of public health as well as natural monopolies; modern life would seem intolerable without electricity or gas. A telecommunications network is similarly important, especially for business. All utilities are important, however. If the service provided by utilities is inadequate in some way, or priced ‘unfairly’, it can quickly become a political issue regardless of ownership of the industry.

As a result of political sensitivity and the tendency to natural monopoly, many governments historically have favoured outright ownership of public utilities. As will be seen later, various arguments exist against the concept of natural monopoly, and of governments owning utilities for this reason. Privatization has occurred in areas of natural monopoly and this is likely to continue. However, for political reasons, no government could totally dissociate itself from public utilities, although it could use instruments other than ownership. Even if utilities were sold to private enterprise, governments would be likely to maintain fairly tight control through regulation.

Land Transport and Postal Service

Land transport encompasses the various public transport systems within and between cities and the postal service is still, almost everywhere, provided by government. Both are essential services like public utilities, but, unlike them, they face competition. This is usually competition from related industries, although direct competition can occur. In the United States, for example, the privately owned UPS and Federal Express compete with the US Post Office and have a greater share of the parcel market than does the public enterprise. The letter mail is an essential service, but, while ordinary letter delivery may have tendencies towards natural monopoly, it faces competition from direct mail, courier services, fax and electronic mail. The competition in public transport comes from private transport, such as freight competition from trucks, while public passenger trains and buses compete with private cars, airlines and private buses. Public transport services could be considered as much an essential service as the postal service and governments do find it politically difficult to cut any part of the public transport system.

Both public transport and postal services have a propensity for poor financial returns. This has led to a run-down in systems, as capital spending is delayed and unions fight to retain the working conditions of an earlier age. If prices are raised or services cut, governments face substantial political costs. Even if fewer citizens use public transport, they still seem to want the service continued and if changes are not made, continuing losses impose greater pressure on already tight budgets. Public transport seems unlikely to be particularly profitable, so that while private buyers have been found in such countries as Japan and Australia, there are continuing problems. Rail privatization in the United Kingdom has been controversial and the mode of a separate company, Railtrack, running the track and making arrangements with separate operating companies has been fraught with problems.

Enterprises in Competitive Environments

These are government-owned trading enterprises which compete directly with private companies and in the same market. This category includes banks, insurance companies, airlines, oil companies, to name but a few. Not surprisingly, this form of public enterprise is the most examined in any discussion of how to scale down the public sector.The list of public enterprises in competitive environment has been considerably reduced by privatization. The question is, if they are profitable and operate no differently from competitors, why should they be government-owned? On the other hand, if they are profitable and well managed, why shouldn’t the government keep them and use the profits in some socially productive way? Governments have involved themselves with enterprises in competitive environments for many reasons: when a company failed in the market place; to stimulate competition; to maintain control of a strategic industry or for other reasons. However, the 1980s and 1990s saw clear expression around the world that this strategy was no longer in favour.